Richard Lowe assesses the UK’s Investment Governance Group and its ongoing work
When the National Association of Pension Funds (NAPF) published a review in 2007 of the Myners’ Principles, it found that pension schemes had progressed considerably in certain areas - shareholder engagement and asset allocation being two - but there was a marked inconsistency when it came to areas such as performance measurement of fund managers and self assessment of trustee’s own competence. The paper, Institutional Investment in the UK: Six Years On, concluded that a more streamlined, less prescriptive set of principles would be more effective.
“The first principles were obviously written in 2001, and an awful lot has happened in pensions in that time,” says Joanne Segars, chief executive at the NAPF. The revised principles, published in October 2008 by the Treasury, the Department for Work and Pensions (DWP) and the Pensions Regulator (TPR), are “refreshed and fit for today”, she says.
The new principles are certainly streamlined, having been reduced from 10 to six. The intention, it seems, is to provide pension funds with greater flexibility so as to allow more scheme-specific approaches while still adhering to the spirit of the principles. Anecdotal evidence suggests, however, that the revised principles themselves are yet to have significant impact on the way pension funds are approaching their investment governance.
“They are shorter, and because they are slightly more tailored they are easier for pension fund trustees to get their heads around,” says Edward Jewitt, partner at Mayber Brown. “But my view is that the simplified principles haven’t had any substantial effect on the ground.”
Jewitt reveals that his pension fund clients have looked at them in trustee meetings and generally agreed that they are broadly in line with the principles, prompting little need for change. “If the government thought they were going to have any sort of substantial effect, then I guess they will be disappointed,” he says.
Professor Gordon Clark of Oxford University, a leading academic in the field of pension fund governance, says there have been a variety of pension fund responses to the new principles, from 10-minute compliance checks during trustee meetings to comprehensive reviews of practices, but he notes that the number of schemes with the capabilities and propensity to use the new principles as a source of innovation are limited.
Clark’s main complaint with the government’s approach is that principles, while important, should only be the first step in pushing forward the agenda. “These codes of practice are important, but they are, I believe, an attempt to bring governance standards up to a minimum in the sector, rather than promote a sort of comprehensive solution to the governance problem,” he says. “Promoting codes of conduct is just the first step in encouraging higher steps of governance.”
That said, the revised Myners’ Principles have not been published in isolation. The government’s intention is to back them up with resources and tools to help pension funds achieve best practice. The Treasury and DWP also established the Investment Governance Group (IGG), chaired by TPR and made up of members from the industry, including pension funds, to drive governance forward, promote the best sources of information to trustees and to seek best practice solutions.
“The important thing was that the industry took some ownership of these principles, and there was a level of self-regulation in that process. That is reflected in the make-up of the group,” says Bill Galvin, IGG chair and executive director for strategic development at TPR. “The fact that I chair it is largely an administrative function… one of the advantages of giving something like this over to the industry is that you have ownership by the industry and it is not seen as something being imposed by government.”
Brian Holden, author of a European pensions governance report published by IPE and Pioneer Investments, however, is sceptical of the overall direction of the project. “The ‘ownership’ of the Myners’ Principles has now passed to the IGG and the government and the industry feels this is a better approach than a government-led approach,” he says. “But does it matter? What is more important than the ownership of the principles is the need for a sensible, practical and workable approach to investment governance that trustees can understand and implement as well as being able to explain their approach to their members.”
Importantly, the IGG has been split into four distinct sub-groups. One of the original complaints of the Myners’ Principles was that they were more geared to larger pension funds and in some ways less applicable to smaller schemes with fewer resources. Defined contribution (DC) schemes, meanwhile, were positively neglected by Myners and many of the principles were irrelevant and did not address the sector’s core issues. Both smaller defined benefit (DB) and DC each have their own dedicated sub-group in addition to two sub-groups focused on large DB schemes and the local government pension scheme (LGPS).
The main IGG group, chaired by Galvin, meets quarterly to review, sign off and give direction to the sub-groups. Galvin describes them as the “four motors” of IGG and says they have all “set out their stall in seeking to achieve different outcomes”.
A group dedicated to small pension funds will no doubt be welcomed by the industry. The aim of the sub-group is to provide high level guidance, but also potentially create education material that will help trustees in applying the new principles. “It is quite a challenging space to talk about issue of investment governance, because they are often quite small players,” says Galvin. “They are very much further back in the chain of investment governance…the issues they might want to address are issues that will focus on raising the profile of this issue with these people and talking about what is achievable at that stage of the chain in ensuring that the issues around mandates for investment managers and responsible ownership are taken into account further down the chain.”
But perhaps the area of most interest and where IGG might have the most impact on the UK pensions landscape is in the DC space. In Galvin’s experience, it is what the group is proposing for DC pensions that is generating the most interest and questions from the industry. “The providers in the industry are very keen to understand what these principles are going to say about the roles and responsibilities for employers, provides, advisers in the governance chain,” he says.
“It is a critical area for us, because DC schemes seem to be where the industry is migrating to and employers seem to be a lot more interested in setting up DC schemes than DB schemes for the moment, for obvious reasons. As the amount of assets in occupational DC schemes increases, the investment governance underpinning those will be increasingly important. And the extent to which responsible ownership requirements are built into the mandates given to investment fund managers in the DC space, for example, will determine the extent to which fund managers prioritise responsible ownership going forward.”
The aims of the DC sub-group sound relatively ambitious. Led by Victoria Nye at the Investment Management Association, it aims to come up with set of principles more applicable to DC schemes - dealing with issues like default funds and member communications - which are clearly part of the investment governance chain. A draft set of principles were seen by the main IGG group in July and a consultation is planned in the autumn.
However, Graham Sims, partner at Hammonds says much of the industry is concerned at the “slow progress” and lack of reporting on the part of the IGG. “For most of the people who are involved in the industry it has been very opaque,” he says, unless you are directly involved in one of the bodies represented on the IGG. “The regulator has said nothing about it really, other than the fact that work is ongoing.”
Galvin admits that the process regarding DC will take time. “It is important to get this right and it is important that it’s got buy-in across the industry,” he says. “The intention is that those will then become an adaptation of the Myners’ Principles that people running DC schemes will either comply with or feel significant pressure on them to explain why not. That will be the significant deliverable this year from the DC group: an actual set of principles, underpinned by helpful pieces of explanatory material like issues on roles and responsibilities.”
Another ‘deliverable’ to emerge in the autumn will be a consultation on amending the regulation and guidance for the local government pension scheme (the Myners’ Principles are embedded in local government scheme’s governance practices to the extent they are a legislative requirement). The group, working with the Communities and Local Government department and the Chartered Institute for Public Finance and Accountancy, is currently writing the new principles into the legislation. “It is about bringing what they have up to date, rather than necessarily, as I see it, pushing the boundaries,” Galvin says.
Meanwhile, the large DB sub-group, led by NAPF’s Segars, is focusing not so much on the new principles but on finding examples of best practice to make available to the industry. “We are particularly keen on developing some case studies so people know what good practice is and people know… what they might want to aspire to. We are currently gathering up those case studies,” Segars says.
This move is much more in line with Gordon Clark’s earlier comments. Clark is involved in research with Roger Urwin of Watson Wyatt to explore best and new innovative models of governance that are particularly relevant to the current global financial crisis.
“TPR in the light of Myners has been properly concerned about setting the minimum standards through codes of conduct, but unfortunately the world has moved on, such that we are not in benign financial circumstances but we are in extremely volatile market circumstances with really tremendous costs being imposed on plans that are poorly governed,” he says.
TPR has made available minutes from IGG’s quarterly meetings on its website (http://www.thepensionsregulator.gov.uk/igg/minutes.aspx)